WASHINGTON — A Senate panel on Wednesday advanced the toughest limits yet on banks' ability to profit from complex financial tools called derivatives.
The bill offered by Senate Agriculture Committee Chairman Blanche Lincoln, D-Ark., would also improve transparency of most derivative trades.
The legislation was approved on a 13-8 vote. Sen. Charles Grassley, R-Iowa, joined the panel's 12 Democrats in supporting the measure. He earlier had supported a Republican substitute amendment that would have softened the bill's strongest provisions.
Lincoln's derivatives bill is expected to be incorporated into the broader regulatory legislation before it is taken up by the full Senate. But many are skeptical a provision barring big banks from running derivatives desks will survive. Lincoln said after the committee vote that she did not know which provisions would end up in the final bill.
Under Lincoln's bill and other Democratic proposals, companies such as AIG would be subject to closer regulation. They also would have to keep minimum levels of capital to protect against market downturns.
All the major plans would require that most derivatives be settled in a centralized system and traded over exchanges. Supporters say this would improve market transparency, drive down prices for users of derivatives and provide more information to regulators.
What sets Lincoln's bill apart is a rule that would bar companies that receive federal guarantees, like insurance from the Federal Deposit Insurance Corp., from most derivatives activities. That would shut down a revenue stream that's become more important for banks as lending has declined.